Charles Li Xiaojia's quixotic quest for the Holy Grail of preferential control
Jake van der Kamp
There appears to be movement on Hong Kong's side, too, with Hong Kong Exchanges and Clearing chief executive Charles Li Xiaojia saying in his blog yesterday that consideration should be given to "non-standard shareholding structures" for innovative companies.
SCMP, October 25
When this monkey business of preferential control over a listed company was last rebuffed by the stock exchange 25 years ago, the wags had it that all questions of democracy in Hong Kong had finally been settled. 'A' shares would have the same voting rights as 'B' shares.
To the accompaniment of a few hoots of laughter, the Jardines empire then slunk off to Singapore. The Keswick family, with an estimated 8 per cent shareholding, had sought to give itself absolute control of the company with preferential 'B' shares. Singapore said, "Yes, yes, yes." That's Singapore for you.
The approach has been a little different with mainland middleman website Alibaba.com. It similarly seeks to guarantee control by founder Jack Ma Yun and some associates, although they will only have a minority holding of the shares. They seek to do it, however, through a "partnership" arrangement. I'm not sure exactly what this means (I'm not sure anyone is) but it appears to involve one group of people having the perpetual right to appoint the majority of the board.
Off to Singapore with you, we said, or, in this case, off to New York where we are told that the online stock exchange, Nasdaq, has agreed.
But Alibaba now says it is in no hurry. Apparently it still prefers the Hong Kong listing, which I can understand. Trading volumes in New York would probably soon wither. New York's standards are low and people are starting to realise it.
And now Charles Li is having second thoughts, too. He is not quite saying, "Come back, Alibaba", but on his blog he is wavering: "What's lost in the debate is whether Hong Kong should embrace new, innovative companies and, if so, how. Losing one or two listing candidates is not a big deal for Hong Kong, but losing a generation of companies from China's new economy is."
And then he says: "The key is to find the right balance between the concessions allowed to founders and the strength and effectiveness of the counter-measures available to public shareholders in the event of disagreement or conflict."
Yes, let's go in search of the Holy Grail. I think he has an impossible task in front of him. In the first place, how are we to define an innovative company? I have yet to find a corporate executive who will openly declare, "I'm a bore. I'm not interested in finding ways of doing things better."
I hazard a guess that what Mr Li means by "innovative" is fancy electronics. It's a common definition. It's also a false one. The business of a good number of these supposedly hi-tech companies consists of little more than leasing precision digital machinery from Germany or Korea and following operating instructions to the letter. What innovation?
I am also not convinced that these "innovators" are naturally the best people to lead a company. I think they are mostly not. They are often obsessed with their technologies to the detriment of returns on capital. If you approve of this, I challenge you to invest your pension money in this sort of company.
Yes, it is true that the founders of many start-ups surrender most of their ownership to venture capitalists. That's the cost of money, I'm afraid, and I would hate to see our stock exchange wreck itself by trying to dissolve such a fundament of human commercial relations.
The fact is that principles of how best to establish a joint stock company have evolved over hundreds of years and Charles Li will find no way of bettering them.
What you do is divide the capital into shares with equal break-up and voting rights. If you want absolute control of the company, make sure you have more that 50 per cent of the shares. If you otherwise want to stay boss, make sure you run the company so well that no-one would think of throwing you out.
And don't insult your shareholders with overuse of the word "innovation".